Good morning, ladies and gentlemen. My name is Jerome and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2019 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask questions during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Now it's my pleasure to hand the call over to your host, Ms. Maria Lee, Treasurer and Vice President, Investor Relations. The floor is yours.
Great, thank you. Good morning, everybody, and thanks for joining us. I'm joined today by our Chairman, President, and CEO, Dave Nord, and our Senior Vice President and CFO, Bill Sperry. Hubbell announced its first quarter results for 2019 this morning. The press release and earnings slide materials have been posted to the investor section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. In addition, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.
Let me turn the call over to Dave.
All right. Thanks, Maria. Thanks, everybody. Good morning. I know it's a busy morning this morning. It appears that April 30th has become a very popular date from when we first decided to move our earnings out. I want to make sure that we get through this stuff. We have a lot of good things to talk about, try and get through briefly and as we can, allow time for some of your other commitments. You can see from our press release this morning, we've had another quarter of strong earnings growth and free cash flow generation. Certainly feel confident about our market position and our ability to deliver differentiated results over the long term. A couple of key items in the first quarter let me talk to, and I'm on page three of the slide deck that we sent out.
As I mentioned, first and foremost, strong organic growth with end markets steady, growing modestly. Most of our end markets were up in the quarter with particular strength in the industrial, gas distribution, and electrical T&D. Importantly, one of the key topics we talked about certainly for the second half of last year, was around pricing. Our pricing actions continue to gain traction, and we've turned the corner on price cost, which was a net positive for us in the quarter after being a headwind throughout all of 2018. We're actively managing price across the portfolio, and remain focused on competing in areas where we can offer differentiated value and earn attractive returns. This is particularly true in lighting, where we're starting to see the hard work Kevin and his team has put into his business over the last several years and really is starting to pay off.
True overall, but especially in lighting. As we've said in the past, we remain disciplined in not chasing after low-margin business and are comfortable with the trade-off that entails on the volume side. Some of that is a result of the efforts that we started to put focus on last year in the breadth of our SKU offering and really taking a much more disciplined look into all of our, and particularly our lower profitable SKUs, and determining whether we could raise price, lower cost, and if we couldn't do either of those to get the margins to an acceptable level, we would discontinue those products. We have that as an ongoing effort, and so that is going to, in some periods of time, in some businesses, in some product lines, will affect our volumes, but all for the good long term. Aclara, another highlight for the quarter.
Revenues are strong in the quarter, driven by continued strength in customer demand. Although the mix was a little less favorable than we had anticipated, which we'll talk about in more detail later. Certainly, customer acceptance of the acquisition surpassed our expectations one year into the deal, and Aclara continues to fill the backlog and pipeline with new business. We expect this highly visible backlog and pipeline to drive some strong revenue and operating profit growth over the next several years as we execute on our longer-term strategy to increase penetration at large IOU customers of Aclara technologies and solutions. We are certainly well-positioned to do so. Free cash flow. On this free cash flow front, we're off to a strong start to the year.
Certainly a lot stronger than we typically are, and much stronger than we were in the first quarter of last year, which puts us well on track to achieve our full-year commitments. Our balance sheet's strong, and we're well positioned to start putting it back to work through accretive bolt-on acquisitions. We'll talk a little bit more about that later. We've made initial progress on our previously announced footprint consolidation and plan to ramp up our investment in the second and third quarter. As we laid out last quarter, this is a multiyear story, which we anticipate driving visible earnings growth and free cash flow generation regardless of the macro environment. We're also continuing to work aggressively to improve our operational capabilities, talent, and processes.
Still early days of the journey, but we expect continued improved productivity and working capital management to drive our ongoing improvement in both operating margins and free cash flow. Lastly, we're reaffirming our full year expectations for adjusted earnings per share of $7.80-$8.20 per share and free cash flow conversion of at least 110% of reported net income. We're confident we're well on our way to a solid start with our results in the first quarter. While there's still a lot of work to do in front of us in terms of our footprint, we believe we're well positioned to execute and deliver on our commitments. Just as I like to do, a couple of key accomplishments in the quarter, in different businesses.
On the construction and energy side, our continental business, which is our gas distribution, the core of our gas distribution business, they won an award from a major national customer for zero defects in a year, and that's the first plastic supplier that they've had to ever accomplish this. Our commercial industrial business, the wiring systems business, was named vendor of the year last year in four major customers. The lighting business was awarded Plant Engineering magazine Product of the Year awards for PowerHub and the Peloton High Bay light fixture. Most notable, Aclara was named the number 2 vendor by Navigant Research in field area network applications for electric utilities. A very significant recognition of the capabilities that they have built and the opportunities, and confirms what we see as the opportunities for that business in the market.
A lot of good things going on, but let me turn it over to Bill, and he can take you through some of the details and the financials for the quarter. Bill?
Thanks, Dave. Good morning, everybody. Thank you all for joining. Dave gave you the highlights from pages three and four. I'm going to start on page five, where we break down our end market performance. As you can see, the end markets are continuing to provide a constructive backdrop, driving our financial performance. Of the 10% sales growth to achieve over a billion dollars of sales in the quarter, five points of that were organic. Nice, strong organic performance. If we disaggregate that into its individual end markets, to talk a little bit about non-res for a second, we've got three lines of business with exposure in non-res, all of them seeing decent growth ranging between the low to mid-single digits, I think consistent with third-party data on momentum there. Positive story for non-res.
Industrial has been a highlight from the quarter, heavy being a little bit stronger than light for us. Again, consistent with some third-party data where we see industrial production in manufactured goods and durable goods showing some good strength. On the oil and gas side, we do see a little bit of mixed performance there. On the oil side, despite having constructive energy costs in terms of price per barrel of oil, our exposure there being, just to remind everybody, more in the upstream. We prefer offshore content versus onshore. That oil piece was sideways for the first quarter. That's in contrast to the gas business, where we saw strong demand and strong shipments. We're seeing both maintenance as well as new conversions to gas on buildings driving demand there for last mile components on the gas side.
Within electrical T&D, distribution a little bit stronger than transmission, but a lot of the order activity and quoting that we're seeing bodes well for transmission distribution as we look out as well. On the resi side, we think that we were impacted by some pre-buys in the fourth quarter there, yet we see the resi market hanging in there in low single digits. Again, across the board, very constructive end markets giving us 5% organic growth in the first quarter. Page six, we'll switch to talking about our profit performance, and you can see adjusted operating income increased by 6% to $139 million. The margins at 12.8% compared unfavorably to last year by 40 basis points. As Dave highlighted, we had very successful execution on the pricing front.
That was quite a broad effort shared by across both segments, electrical and power, across all the business units. We believe that price overcame inflation that we experienced in the form of tariffs as well as material inflation, and added about a half a point of margin to us. We're still seeing on the material side, although not all raws, but as a basket, we're still operating in a net inflationary environment there. That half point of contribution, though, was absorbed by the impact from the acquisition contributing lower margins than average, and thus creating some headwind. On the earnings per diluted share side, you see a 4% increase to $1.57, and those earnings had to absorb a higher effective tax rate in the first quarter. We had an ETR of around 24.7% in the quarter versus last year in the low 21% range.
We do expect that to be in our guidance range for around 23.5% for the year. That created a little bit of headwind for EPS. The operating side stronger than the EPS performance as indicated there. Page seven, let's switch to breaking down that performance into our two segments, and we'll start with electrical. You can see sales increased of 2% to $630 million with FX creating a point of headwind. Organic growth of 3%, to which price was a very large component. In terms of where the growth came from, business units that were helping drive growth included the gas area, industrial, particularly on the heavy side, and commercial construction areas. Harsh and hazardous, which is exposed to the oil market that we talked about, would've been an example of a lower growth area.
They were actually down, they would've dragged that number down a little bit. When we looked at the operating income there, impressive 11% increase on that sales growth and a noteworthy 90 basis points of margin expansion to 11.8%. Solid execution of the pricing strategy across all three operating groups in the electrical segments. We had solid execution on the productivity front that Dave had referred to, and we certainly have adopted not wanting to chase volume for volume's sake. As Dave highlighted, some of that SKU rationalization work, combined with some of that pricing work, really helped drive a very strong performance in electrical. We typically share with you Lighting performance, specifically within this segment. Lighting business grew at 2%. There was balance between the resi and commercial industrial halves of the business. Lighting, too, executed on price, which is quite good news for us.
They covered both the tariffs and material inflation they experienced to have a positive price cost, and were able to expand margins. Solid contributions from Lighting into the segment. Page eight, we talk about the Power Segment results. You'll see strong growth at 23% increase in sales in the first quarter to $457 million. Aclara was the largest contributor to that growth. You'll see we refer to organic as well as acquisition. Aclara was an acquisition for the one month of January, since we closed on it on February 2nd. January was an incremental acquisition month, which she added, drove 14% of the 23. They also were a big contributor of the organic during February and March, as Dave highlighted, customer acceptance there, very strong demand for their product, very strong.
As well, we saw on the legacy side, domestic distribution was a growth driver. The legacy business also had some difficult compares from storm volume that was strong last year, as well as some softness on the international side. On the performance front, in terms of operating income, we saw 2% growth to $65 million. Margins at 14.2% were down from last year. Again, similar to the story for the company where we executed well on the pricing strategy, and we got the price to be above tariffs as well as material inflation, but that was absorbed by including Aclara, which contributed lower margins than the average and brought the margin down. Aclara has pronounced seasonality in the first quarter, as they have done historically. They plan their year to include that.
The seasonality is stronger than in other businesses of ours, where the weather can impact the installation productivity on the one side, as well as the timing of shipments, which impact the mix. We anticipate that will normalize through the balance of the year. That's the seasonality that they have, which you see here. Turning to page nine and cash flow, which Dave had highlighted. The comparison year-over-year here between 2018 to 2019 is exaggerated by some of the one-time outflows we experienced last year, resulting from the Aclara acquisition as well as some tax form items. There's about $25 million, you recall, from last year of those one-time items. Even adjusting for that, an impressive increase. I think it's also constructive to think about how much, on average, we tend to see of our annual cash flow in the first quarter.
Seasonally, the first quarter is always our lowest. It's very positive for us to see this level at a much higher percentage of what we expect for a full-year contribution. It's good to feel ahead on the free cash flow front. Despite being driven by, obviously, the higher net income, but really what's helping is the working capital improvement. We're really working hard across the board between the receivables and payables, but I think the area that is consuming the most effort on our part is on the inventory side, just continuing to drive days down there and to continue to get a good cash flow conversion. Certainly feel good about being on track to that 110% of net income for the full year. The team is working very hard to do better than that.
That certainly helps drive some of the capital structure considerations, which I'll ask Maria to share with you.
Okay. Thanks, Bill. Capital structure on page 10. Our balance sheet remains strong. We ended Q1 with $205 million of cash and $50 million of commercial paper outstanding. During the quarter, we paid down amortization on our term loan as well as funded the dividend, invested $23 million of CapEx, and bought back $10 million worth of shares. Our four tranches of senior notes have favorable rates in the low to mid 3% range and have maturities that are well spread out, with the next one in 2022. Our net debt to cap ratio is healthy at 42%, and our leverage, in terms of gross debt to EBITDA, is about 2.5x. This is down from more than 3x a year ago, pro forma for the Aclara acquisition. On a net basis, debt to EBITDA is about 2x.
We feel confident in our ability to continue managing our leverage given our cash generation and repatriation potential. Importantly, consistent with our longstanding growth strategy, we believe our balance sheet is in solid shape to support bolt-on acquisitions near-term. I'll turn the call over to Dave to talk about the outlook.
Okay, thanks, Maria. On page 11, talking about our end market outlook for the year. Our dynamics there are pretty steady. We continue to see low single-digit growth overall. The one change here is a little tweaking down of the oil and gas. Originally, we had said 3% to 5%. Take that down to 2% to 4%, mainly given the softness we saw particularly in oil in the first half, not on the gas side. Again, we expect some pickup in that in the second half, and gas should be good for us and remaining strong throughout the year. As we talked about before, we do think there's some level of trade-off between price and volumes, while we typically target outgrowing our markets, we're happy to grow in line, at least near term, at more attractive margins with the market.
This is something we're going to continue to actively manage throughout the year. I'm very confident in our ability to manage this and deliver on our commitments. Turning to page 12, on the outlook, as I said, we're reaffirming our outlook for the full year. We continue to expect net sales growth of 4% to 6%, with end markets up low single digit, acquisitions contributing a point, and price realization on top of that. I think that growth rate is very much consistent with what I saw recently in a survey of 200 electrical distributors. I think their forecast for the year was about 6% growth overall, which would include price. My experience says that they tend to be more positively biased, I'd probably discount that by a point.
On the other side, you've got 200 electrical distributors who really are on the ground and have a really good insight into what's happening. We take that as a fairly reliable source. Obviously, it would depend on the different markets and product offerings, but I think that all bodes well for at least the market for this year. We continue to expect adjusted EPS of $7.80 to $8.20. That excludes intangible amortization of $1.00, but it does include $0.40 of restructuring and related investment. We expect to ramp up our restructuring-related investment in the second and third quarter. We laid out the framework for you last quarter, we're reiterating those targets. We're well prepared to execute and excited about the initiative. We've started some. We'll see more initiated in the second quarter and throughout the summer.
We'll update you over the next several quarters as we ramp up and take actions that we then can communicate.
Obviously, on the cash flow front, we continue to expect free cash flow conversion of 110% of net income, well on our way with the first quarter performance. As Maria said, free cash flow is a critical and positive aspect of our story as we execute on our working capital initiatives and use that positive cash flow to reinvest in the business and reinvest in other businesses. We put that all together in the graph format on page 13. You see we reaffirm our outlook with positive results year-over-year coming from operations. I can't emphasize enough how strong we saw the operations in the first quarter. The results that we put up overcame the less than favorable mix that we saw at Aclara, as well as the tax headwind that we saw in the first quarter.
Really strong operating performance from the broad team. We'll manage through our footprint, our tax, and expect to deliver consistently with what we've said so far this year. With that, maybe I'll open it up to Q&A.
Ladies and gentlemen, at this time, if you would like to ask questions, simply press star then the number one on your telephone keypad. Again, hit star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. All right, your first question comes from the line of Nigel Coe from Wolfe Research. Nigel, your line's now open.
Hey, guys. This is actually Michael on for Nigel. How are you?
Hey, Michael.
Hey. Could you just walk through how you guys are seeing the cadence for price cost? We're kind of assuming that one Q was the toughest quarter. How do you see the remainder of the year?
Yeah, I think, Michael, we anticipate that we need to continue to pull price. We had been pulling price all through last year, so that price piece, you actually, as you get to the second half, you end up passing some of the price increases that we'd implemented last year. On the second half of the equation, though, on the material side, particularly steel, which is a large raw material of ours, you'll start to see potentially some favorability, which creates, I think, the effect you're saying, where you can end up with some contribution from that as the year progresses.
Got you. That's helpful. Then just one more. On the lighting spend, does this change your view at all on the Hubbell portfolio in its totality?
Well, look, we've been investing in lighting, as David mentioned, over the last several years. We've been taking some of their fixed costs out, been reorganizing the business. We've been investing in the front end on the agent side. It's good to see those investments paying off right now for sure.
Definitely. All right, I'll leave it there. Thanks, guys.
Your next question comes from the line of Christopher Glynn from Oppenheimer. Christopher, your line's now open.
Thank you. Good morning.
Morning, Chris.
Hey, was wondering about the comment of investing on the agency side of lighting. Can you talk a little bit about specifically what's going on there?
Well, no, just over the last couple of years, we had added and strengthened our representation on the front end in specific markets, for example, the Southeast and the Midwest and out on the West Coast, Chris. That's not new news. That's just yields on investments we've made over the last couple of years.
I think importantly, Chris, that's something that Kevin and his team focused on. One of the reasons that contributed to our under-representation was our inability to actually perform at a level that good agents were expecting. The first was to get the operations in line and performing with the right product mix and the right service levels, which then made it easier for us to be able to convince good agents to move over to a good company with Hubbell Lighting.
Sounds good. On Aclara, could you talk about the growth there a little bit? I'm curious about, obviously, your win rate's good, but curious about actual competitive displacements that you're seeing and share gain in that respect from Aclara, and how much of that is because Hubbell now owns them.
Yeah, I think it's a little hard for us to attribute that other than anecdotally. I think we've gotten a lot of really positive feedback from our core customers that they're happy that it's in our portfolio, somebody who they value and trust the relationship with us and the quality of the products we provide and standing behind our products. I do think there's some benefits there. I'm not sure that there is displacement that we see specifically. I do think that the thing that will be good for us is to get more communication, higher margin communication products into that mix, Chris. I think that combines the two halves of your question, where our traditional customers, and those sales cycles are over a couple of years, right? It's not over a couple of months or quarters.
That's what we're really looking forward to, is the communication side of that growth catching up to the other side of the business.
Yeah, Chris, I think one of the things that Bill just mentioned is on big projects, the sales cycle is a little longer. I can tell you that there are examples on a smaller level, ones that you wouldn't notice, of where there's been benefit on the legacy Hubbell Power Systems in Aclara customers that we historically hadn't penetrated, and vice versa, which is exactly the premise of the strategy for the acquisitions. One element, bringing the technology, but also bringing a comparable market presence that we can build on. I think there's a lot of good things going on, but the big hits are going to come over time.
I've had the benefit of sitting in, Chris, on some customer meetings where we have both Aclara senior management with Hubbell Power Systems senior management, and as Dave said, that's a really powerful meeting that's different than meetings that we used to have in either half. I think there's a big complementary nature to that our customer base is favorably reacting to.
Thanks for that. Last one. Sounds like price cost favorability might widen a little bit. You get the steel factor there. You also have restructuring was a little lower in the first quarter. That's going to step up. As we think about the first quarter base, are those two kind of offsetting going forward, or is it more the net restructuring kind of lifts off?
I think it's the net restructuring that starts to pick up, Chris.
Got it. Okay, thanks for the color.
Okay.
Once again, if you would like to ask a question, simply press star, then the number one on your telephone keypad. Your next question comes from the line of Deepa Raghavan from Wells Fargo. Deepa, your line's now open.
Good morning, all. Good Q1. Looks like it was better than your expectations.
Thank you
The full year guidance was maintained, though. Just a question on that. How much of the full year guide being maintained is largely a function of historically maintaining guidance in April versus some of the incremental weakness you called out versus your prior expectations? Example, oil and gas, restructuring steps up. Generally, if you can help me why the guide remains unchanged and some puts and takes, that's helpful. I have a follow-up.
I'll give you the overall. Bill can weigh in on any specific puts and takes. Clearly, if you go back in history, we just don't change early in the year. Remember, we're largely a short cycle business, so our visibility is somewhat limited. We're relying on market expectations, so we're always cautious coming out of the first quarter. Certainly, our results in the first quarter give me confidence that our guide is good, as opposed to some periods in the past where we might not have had that level of confidence. We think it would be premature to change anything specifically, unless there's a major mover in there, which we don't have.
Yeah, I think, Deepa, if we were looking for what we learned in the first quarter, I think there was a couple of important learnings. One was the market strength hung in there. Two, that our pricing strategy had some traction. I think that those things underline some of Dave's confidence. It feels good to be off to a good start.
Got it. Can you talk about how the quarter played out by month, if you can, and specifically if you can address the momentum exiting the quarter and into April? Generally, how do you feel about start to the current quarter? That would be very helpful. Thank you.
Yeah, I'm not sure there's much significance to monthly analysis as the year went by, Deepa. I think January can be a distorted month for us. There was probably some pull forward in some of the tariff sensitive areas in the fourth quarter that causes some softness in January that can also be affected by customer incentives. I think as we analyzed our results by month, we didn't draw much momentum conclusions month to month, but rather looked at the quarter as being a good contributor. We spent some time thinking about what the first quarter usually contributes from a sales, OP, and earnings perspective to the year. It felt good to have reasonable comparisons there that were not depending on a back end load or anything like that.
You feel good about April so far? That's the read for me, right?
Yeah, I think what we've seen is consistent with our outlook, yes.
Thank you very much. I'll pass it on.
Once again, if you would like to ask a question, simply press star, then the number one on your telephone keypad. Again, to ask a question, please press star, then the number one on your telephone keypad. At this time, there are no question on queue. Presenters, you may continue.
Okay, great. Thanks, everyone, for joining. This concludes today's call. Dan and I will be available following the call for questions. Thanks again for joining us.
Thank you. That concludes first quarter 2019 results conference call. You may now disconnect.